New York Said to Broaden Mortgage Probe With Delaware

Karen Freifeld and David McLaughlin

June 13, 2011, 2:54 PM EDT

New York has broadened its probe of the U.S. mortgage industry, requesting information from additional financial institutions as part of an investigation into the way mortgages were bundled and sold to investors, two people familiar with the matter said.

New York Attorney General Eric Schneiderman’s office requested documents from Deutsche Bank AG and Bank of New York Mellon Corp., which act as trustees for mortgage-bond trusts, said one of the people. Between five and 10 trustees are being asked to provide information, said the person, who declined to be identified because the matter isn’t public.

The request from Schneiderman is part of a wider investigation by his office into mortgage practices and the packaging and sale of loans to investors. The attorney general’s investigation has included banks such as Bank of America Corp. and JPMorgan Chase & Co., bond insurers like MBIA Inc. and at least one law firm that handles foreclosures on behalf of lenders.

New York and Delaware agreed to share information gathered from the trustees, said the person. The two states are interested in probing the way mortgages were pooled and securitized and have focused on the trustee banks because of their role in the process, said a second person, who declined to be identified because the matter isn’t public.

Document Transfers

One issue is whether loan documents were properly transferred to the trusts, the person said. The trusts issued securities to investors backed by the pools of mortgage loans. A second issue is the due diligence performed on the quality of the loans going into the trusts and the representations made to investors, the person said.

The New York Times reported the expansion of New York’s probe earlier.

The investigation by Schneiderman and Delaware Attorney General Beau Biden comes as attorneys general from all 50 states and federal agencies investigate the way banks handle mortgage loans and conduct foreclosures. The group is in settlement talks with the five largest mortgage servicers, including Bank of America and Wells Fargo & Co. State and federal officials want the banks to fund loan principal reductions for borrowers as part of any deal.

James Freedland, a spokesman for Schneiderman, declined to comment, as did Jason Miller, a spokesman for Biden. John Gallagher, a spokesman for Frankfurt-based Deutsche Bank, and Kevin Heine, a spokesman for Bank of New York, declined to comment.

‘To the Letter’

Mortgage securitization requires several properly executed transfers, and if the required legal steps aren’t followed “to the letter,” ownership of the mortgage loans may come into question, according to a report last year by the Congressional Oversight Panel. If the process didn’t comply with documents governing the securitization, then the assets wouldn’t have been transferred to the trust, according to the report.

“If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe,” the report said. “Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse.”

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